CES Energy Solutions (OTC:CESDF) (ticker not provided) has reported a historic first quarter in 2024, with record-breaking revenue and EBITDA figures. The company announced a revenue of $588.6 million, the highest in its history, and an EBITDA of $102 million with a margin of 17.3%.
This performance underscores the company's robust business model and its strategic focus on technology, product offerings, and potential international expansion.
CES completed its share buyback program and is planning to renew it, while also looking to reduce leverage and continue paying dividends.
Key Takeaways
- CES Energy Solutions achieved record Q1 revenue of $588.6 million and EBITDA of $102 million.
- The company completed its share repurchase program and plans to renew it in July 2024.
- CES aims to maintain revenue levels and pursue business development, with a cash CapEx of approximately $70 million for 2024.
- All divisions reported margins over 15% in the past quarter.
- CES is considering new geographies and vertical integration to enhance its business.
Company Outlook
- CES Energy Solutions is optimistic about sustaining revenue and exploring business development opportunities.
- The company's LTM ROACE reached 23%, reflecting strong performance.
- CES plans to access the bond market before the Term Loan A matures next April, subject to market conditions.
Bearish Highlights
- The acquisition of ChampionX by Schlumberger (NYSE:SLB) is not perceived as a significant threat to CES.
- CES will reassess its capital return program if share prices increase.
Bullish Highlights
- CES sees no limit to further share gains in the US market.
- The company is open to hiring strong sales and operational personnel from competitors.
- CES is optimistic about the potential for entering new geographies and vertical integration.
Misses
- There were no significant updates regarding the company's entry into the Haynesville region.
Q&A Highlights
- Ken Zinger discussed plans for entering new geographies and vertical integration opportunities.
- Tony Aulicino confirmed that every division had margins above 15% and discussed the company's debt structure.
- CES announced a virtual AGM on June 18th and a Q2 update in August.
CES Energy Solutions' financial results from the first quarter of 2024 reflect a company on the rise, with a strategy that has yielded record revenues and EBITDA.
The company's disciplined approach to capital spending and its ability to generate strong cash flows position it well for future growth and shareholder returns.
With plans to renew its share buyback program and a focus on strategic acquisitions and dividends, CES is poised to continue its positive trajectory.
The company's consideration of new markets and vertical integration indicates a forward-looking approach to expansion and efficiency.
Despite the competitive landscape, CES's strong margins and optimistic outlook suggest a confident stance in its operational and financial strategies.
InvestingPro Insights
CES Energy Solutions has shown remarkable financial performance in the first quarter of 2024, and InvestingPro data provides additional context to this success. With a market capitalization of $1.12 billion and a price-to-earnings (P/E) ratio of 9.09, the company is trading at a low P/E ratio relative to its near-term earnings growth. This could indicate that the stock is undervalued given its earnings potential. Moreover, the P/E ratio has slightly adjusted down to 8.69 over the last twelve months as of Q1 2024, which further highlights its attractiveness to value investors.
The company's revenue growth has been steady, with a 5.56% increase over the last twelve months as of Q1 2024. This aligns with the company's record-breaking revenue reported for the quarter. Additionally, CES Energy Solutions maintains a healthy dividend yield of 1.83%, and it has raised its dividend for 3 consecutive years, demonstrating its commitment to returning value to shareholders.
InvestingPro Tips for CES Energy Solutions point out that the stock is currently in overbought territory according to the Relative Strength Index (RSI), suggesting that it might be due for a pullback. However, the company has also experienced a significant return over the last week, with a 15.76% price total return, which complements the strong return over the last year at 179.34%. This indicates a strong bullish trend in the short term.
For investors seeking more information, there are an additional 13 InvestingPro Tips available at https://www.investing.com/pro/CESDF. These tips offer insights such as the company's liquidity position, long-term profitability, and analysts' predictions for the year.
To explore these insights and more, readers can use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription at InvestingPro.
Full transcript - Canadian Energy (CESDF) Q1 2024:
Operator: Good morning, everyone and welcome to the CES Energy Solutions First Quarter 2024 Results Conference Call and Webcast. As a reminder, all participants are in a listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Tony Aulicino, Chief Financial Officer. Please go ahead.
Tony Aulicino: Thank you, operator. Good morning, everyone and thank you for attending today’s call. I’d like to note that in our commentary today, there will be forward-looking financial information and that our actual results may differ materially from the expected results due to various risk factors and assumptions. These risk factors and assumptions are summarized in our first quarter MD&A and press release dated May 8th, 2024, and in our annual information form dated February 29th, 2024. In addition, certain financial measures that we will refer to today are not recognized under current General Accepted Accounting Policies. And for a description and definition of these, please see our first quarter MD&A. At this time, I’d like to turn the call over to Ken Zinger, our President and CEO.
Ken Zinger: Thank you, Tony. Welcome, everyone and thank you for joining us for our first quarter 2024 earnings call. On today’s call, I will provide a brief summary of our incredible financial results released yesterday, followed by an update on capital allocation, and then our divisional updates for Canada and the US. I will then pass the call over to Tony to provide a detailed financial update. We will take questions, and then we will wrap up the call. I’ll start my comments today by highlighting some of the major financial accomplishments we were able to achieve in Q1 of 2024. They include all-time record revenue – record Q4 revenue of $588.6 million, our highest quarterly revenue ever, beating the prior record set in Q4 of 2022 by almost 5%. Our all-time highest quarterly EBITDA of $102 million, beating our prior all-time record level set last quarter of $84.6 million by over 20%. EBITDA margin of 17.3% versus 13.8% in Q1 of last year and 15.3% in the prior quarter. This result was the highest quarterly EBITDA margin achieved by CES in nine years as we continue to focus on returns. As predicted on the Q4 2023 earnings call, we have now exhausted purchasing all of the 18.7 million shares allowed under our – our prior NCIB plan from July of 2023. Free cash flow of $57.4 million during the quarter, and the total debt to trailing 12 months EBITDA ratio dropped to a new low of 1.28 times from 1.49 times at December 31st, 2023. I now want to confirm that our capital allocation plans for 2024 remain the same as stated on the last call. We will continue to support the business with the necessary investments required to provide acceptable growth and returns. We’ll continue to look for tuck-in acquisition opportunities into related business lines or geographies where we believe we can add value and grow returns. We will continue to pay our quarterly dividend of $0.03 per share or approximately $28 million per year. We intend to renew our NCIB plan once we are able in July of 2024. We will once again maximize the number of shares available for repurchase under the NCIB at 10% of our float. We will continue to exercise the NCIB to its maximum until we see a share valuation more aligned to our financial performance. We will use the balance of our remaining free cash flow to continue reducing leverage to approximately 1 times total debt to trailing 12 months EBITDAC. I’ll now provide a brief summary of Q4 performance by division. Today, our rig count in the North American land market stands at 171 rigs out of the 723 listed as running, representing a market share of 23.6%. The Canadian Drilling Fluids division continues to lead the WCSB in market share. Today, we are providing service to 39 of the 118 jobs listed is underway in Canada. Drilling and activity in Canada so far in Q2 2024 is tracking a little higher year-over-year. However, rig counts at this time of the year can be a little lumpy as rigs are shutting down daily due to spring breakup. The space remains highly competitive. However, our offering of competitive pricing, along with high levels of service, employee expertise and thousands of historical assets almost everywhere in the WCSB, provide us with a value proposition that is second to none. We remain excited about the prospects for 2024 and anticipate it will be a little stronger year overall due to the completion and impending start-up of infrastructure projects and their associated takeaway capacity for our market. PureChem, our Canadian production chemical business grew again in Q1. The vast majority of the lines within PureChem continue to grow as we have continued to take market share, win bids, optimize formulations and fine-tune our supply chain. The revenue and earnings for our primary business, production treating continues to accelerate in Canada as we continue to deliver superior products and service combined with competitive market pricing. Now for the US. AES (NYSE:AES), our US Drilling Fluids group is providing chemistries and service to 132 of the 605 active rigs listed is working in the USA land market today, representing a continued number one market share of US land rigs at 21.8%. The number of rigs drilling in the USA was slightly down again quarter-over-quarter, but we do see this level as being at or near the bottom of the trough. We continue to enjoy a basin leading 104 rigs out of the 316 listed is working in the Permian Basin, again, equating to our highest ever market share in this basin of 31 – sorry, 33.1%. I will note that although the USA land rig count is down since our last call, the rig count in the Permian is roughly flat. That said, service intensity continues to demonstrate its presence in our numbers for AES, as our rig – sorry, our revenue per rig per day continues to rise with more footage being drilled each day along with more complicated chemical solutions and service being provided due to the complexity and length of the horizontal sections. This was evidenced in the continued strong financial performance by AES in spite of a rig count that was almost 20% lower than its peak last year at this time. We see this trend continuing for the foreseeable future on both sides of the quarter. Finally, Jacam Catalyst had its strongest financial performance ever in Q1. We continued the recent trend of winning more business in this division. An internal analysis has us concluding that we are comfortably the number one provider of production chemicals and the related service in the Permian Basin, even as we continue to grow. As with PureChem, Jacam Catalyst continues to take market share and grow revenue, all while providing competitive market pricing. They are doing this through best-in-class service and responsiveness, diligent problem-solving and constantly optimized formulations and manufacturing. To summarize these operations reports, I want to emphasize that we continue to observe growth prospects directly in front of us in the markets we already are participating and established in. We continue to anticipate growth in revenues and free cash flow during the upcoming year as we earn new business and grow our market share in each of our business segments. As well, I want to emphasize that we are a technology company with scientists and manufacturing infrastructure as well as a strong connection to our customers and their challenges. This combination of strengths allows us to continue to fine-tune our product offerings in order to find unique solutions to complicated problems. As was made obvious during this past quarter, when we find solutions that meet this criteria, we are able to provide it to our customers at outsized margins that can be extremely attractive to CES, but still in line with the value proposition required by our customers. Then we have been able to use these technologies to gain more market share by helping other customers achieve the results-based [inaudible] as well. As a secondary focus, we continue to look for opportunities to potentially enter strategic international markets in order to establish a foothold in these regions, which we have no exposure to currently. We are also spending significant time evaluating North American tuck-in acquisitions of similar businesses to ours as well as potential opportunities to further improve our vertical integration. Finally, I would like to highlight that the recent consolidation in the space by SLB clearly demonstrated the value of capital-light, asset-light, high free cash flow businesses like ours. We believe that valuation markers such as this support our aggressive buyback philosophy at current and even higher share price levels. As always, I want to extend my appreciation to each and every one of our employees for their commitment to the business culture and success of CES. Once again, this quarter, we have increased our total number of employees at CES from 2,236 on January 1st, 2024, to 2,304 at the end of Q1. This is an increase of 68 employees so far this year or approximately 3%. In conclusion, I would like to note that the results in Q1 were once again not due to any one division or an area excelling. This is a balanced effort across the company in which every business unit contributed speaks once again to the quality of the people employed everywhere in every division here at CES Energy Solutions. With that, I’ll turn the call over to Tony for the financial update.
Tony Aulicino: Thank you, Ken. CES’ financial results for the first quarter set all-time high levels of revenue and adjusted EBITDAC, underscored by the continuation of strong free cash flow despite declining rig counts in the US, highlighting the unique resilience of CES’ Consumable Chemicals business model and attractive performance aligned with the prevailing trend of high service intensity levels. The record quarter benefited from strong financial contributions from all parts of the business and was bolstered by favorable product mix, high levels of service intensity and the adoption of innovative technologically advanced products. We continue to serve the evolving needs of our customers and realize attractive economics due to our vertically integrated business model and effective supply chain management. In Q1, CES generated record revenue and adjusted EBITDAC of $589 million and $102 million, respectively, representing a 17.3% margin. Q1 revenue of $588 million represents an annualized run rate level of approximately $2.4 billion and a 6% increase above both Q4 2023 and prior year of $553 million and $558 million, respectively. Revenue generated in the US was a record $388 million and represented 66% of total revenue. This revenue figure exceeded the $361 million in Q4 and $369 million a year ago. Revenue generated in Canada also set a record at $201 million in the quarter, up from $192 million in Q4 and $189 million in Q1 2023. US and Canadian operations saw increased levels of service intensity in Production Chemical volumes driven by complex drilling programs. Customer emphasis on optimizing production through effective chemical treatments benefited both countries and countered declines in US industry rig counts showcasing the resilience of our business model. Adjusted EBITDAC of $102 million set a record in Q1 and represented a 32% increase from $77.1 million in Q1 2023 and a sequential increase of $17.4 million or 21% from the $84.6 million generated in Q4. Adjusted EBITDAC margin in the quarter increased to 17.3% compared to 15.3% in Q4 and 13.8% in Q1 2023 and was reflective of increased service intensity and attractive product mix and continued adoption of innovative, technologically advanced products supported by prudent cost structure and vertically integrated business model. During the quarter, CES generated $86 million in cash flow from operations out of $39 million in Q4 and $73 million in Q1 2023. These improvements came from strong revenue levels, attractive margins and sustained improvements in working capital management. Funds flow from operations, which excludes the impact of changes in working capital, was $74 million for Q1, representing a 9% increase over $68 million in Q4 and 18% over $63 million in Q1 2023. CES continues to maintain a prudent approach to capital spending through the quarter with CapEx spend net of disposal proceeds of $21 million. We will continue to adjust plans as required to support existing business and grow throughout our divisions. And for the full year 2024, we continue to expect cash CapEx to be approximately $70 million, split evenly between maintenance and expansion capital to support sustained revenue levels and accretive business development opportunities. During the quarter, we completed our NCIB program, purchasing 4.6 million common shares at an average price of $3.88 per share for a total of $17.8 million. In total, under the existing NCIB program, we repurchased the full 18.7 million common shares at an average price of $3.66 per share for a total of $68.6 million. As a reminder, since inception of our NCIB programs in 2018, CES has repurchased approximately 23% of outstanding shares at an average price of $2.63 per share. We ended the quarter with $435 million in total debt, representing a decrease of $35 million from the prior quarter. Total debt is comprised primarily of the $250 million in Canadian term loan facility, which was used to settle the company’s senior notes in November, a net draw on the senior facility of $105 million and $71 million in lease obligations. Total debt to adjusted EBITDAC improved to 1.28 times at the end of the quarter compared to 1.49 times at December 31, 2023, demonstrating our continued deleveraging trend. When you account for the $18 million spent on share repurchases and the $6 million in dividends, the reduction in total debt in Q1 could have otherwise been $60 million. However, we are very comfortable with our current debt level and leverage in the 1 to 1.5 times range, thereby facilitating strong return of capital to shareholders and prioritizing sustainable dividend and share buyback levels. Our consistent, prudent capital structure management and strong financial results were recognized recently by credit rating agencies and led to positive rating actions by DBRS to B High positive outlook and S&P to B Flat positive outlook as well. I would also note that our working capital surplus of $637 million exceeded total debt of $435 million by $202 million and demonstrated continued improvement compared to both prior quarter and prior year. Continued focus on working capital optimization has led to improvements in cash conversion cycle to a record 106 days for the quarter from 112 days in Q4 2023 and 119 days in the prior year. This also translates to a reduction in operating working capital as a percentage of annualized quarterly revenue to 27% from 29% in Q4 2023 and 31% in the prior year. It should be noted that each percentage improvement at these revenue levels represents approximately $24 million on our balance sheet in incremental value realization. This very strong surplus free cash flow trend is indicative of the cash flow-generating characteristics of CES in this environment and is further illustrated by our current net draw, which has declined by another $40 million to $65 million as at May 8th. We have dedicated our efforts to profitably growing market share, improving margins and delivering consistent free cash flow, a record setting revenue levels underpinned by improving capital structure. Internally, we have spent the last few years implementing very specific return on average capital employed metrics at the divisional levels. This approach has led to a cultural adoption of key ROACE maximizing factors such as profitable growth, strong margins, working capital optimization and prudent capital expenditures. I am proud to report that as a result of these efforts and this cultural shift, consolidated LTM ROACE is now sitting in a record-setting level of 23%. These record financial achievements have allowed CES to deliver on our commitments to returning capital to shareholders. During the quarter, we returned $24 million through $18 million in share buybacks and $6 million in dividends, representing 41% of free cash flow. At current levels of activity, market share and service intensity, CES remains in a position of strength and flexibility supporting our capital allocation priorities, as outlined by Ken. At this time, I’d like to turn the call back to the operator for questions.
Operator: Thank you. [Operator Instructions] The first question comes from Aaron MacNeil with TD Cowen. Please go ahead.
Aaron MacNeil: Hey, good morning. Appreciate the time for a few questions. I wanted to sort of look at capacity from a couple of different angles. What would you say are current pinch points, if any, in manufacturing, blending, distribution or other areas of the business? And if it’s applicable, I’m sort of wondering what the remediation steps might be? I know there’s some growth capital this year. And if it’s not the case, I’d like to understand what sort of revenue growth do you think you could sustain without a significant capital investment?
Ken Zinger: Sure. I’ll take that one, Aaron. Thanks. As far as capacity goes, we constantly are able to manipulate our capacity. So at the plants – at Sialco and in Kansas and even the blending plants in Carlyle and Midland, we’re able to just add blend vessels or ad reactor vessels as we need them. So it’s a constantly – it’s part of our CapEx annually. We anticipate our revenues, we anticipate our volumes. And if we need more capacity, we just simply add little pieces of infrastructure like that, it’s not building buildings or changing how we do things in any way. So it’s been – that’s been something that’s been going on as we’ve grown from sort of the $1.3 billion, $1.2 billion in revenue that we used to do to the current $2.4 billion. It’s a constantly adopting thing. The one pinch point that we identified last year when early ‘22 – or sorry, early ‘23 was the barite grinding facility. That one took having either we had to buy it somewhere else because you can only grind so much barite when you’re running 24 hours a day with the mills we had, and that was the driver for us building the [Pecos] [ph] facility. But that’s now done operational, and we have plenty of capacity there as well. So currently, there is none. And I think the only limitation would be our suppliers’ capacity. But I mean, after everything we went through in early ‘22 with the supply chain constrictions, we’ve learned a lot about the playing field for basic molecules, and we – I don’t see any way that we would run into a shortage situation.
Tony Aulicino: I would add that over the last year and we have this in our investor deck, where we actually illustrate different areas where we spend CapEx on to do things like debottlenecking and another one was expansion in the Permian, our divisional presidents at AES and Jacam Catalyst over the last couple of years on the foresight to overbuy and actually buy more property and space, and that wasn’t because we were limited buying machines and reactors, et cetera. It’s those investments that were done over the last year, and we’ll probably do a few small ones this year as well, give us more space in the areas that we’re very busy at to allow our operational folks to streamline flows and in production and logistics and work very closely with procurement and operations to meet these increasing volume demands.
Aaron MacNeil: Got you. And then maybe just sticking with the theme of capacity. I’m saying corporate takeovers, there’s inevitably going to be people who don’t want to stick around. I mean, you mentioned that you’ve already added people year-to-date. Does the SLB acquisition of ChampionX create an opportunity for you to bring on some strong sales or operational people to either Jacam Catalyst or PureChem to sort of increase the size of the pie and do you want or need these people assuming they can bring a client list? And I can appreciate that there’s some sensitivities whenever people are involved, but I’d be interested in hearing anything you could share from that perspective.
Ken Zinger: Yeah, for sure. I mean, I think any time there’s a people like that, where there’s a change in control of the company, there’s going to be people that are dissatisfied. And our door is always open. We’ve been – we’ve got our eye on quite a few of our competitors’ people for a long time. And if they happen to become available for sure, we’ll talk to them.
Aaron MacNeil: Okay. Thanks, guys. I’ll turn it over.
Operator: The next question comes from Cole Pereira with Stifel. Please go ahead.
Cole Pereira: Hi. Good morning, all. Maybe sticking with a similar theme. How do you think about Schlumberger’s acquisition of ChampionX in terms of how it’s going to impact competition or maybe opportunities for CEU?
Ken Zinger: I think Schlumberger is a great company. They do a lot of good business internationally. And I think that they’re challenged by corporate structure a little bit to be as responsive as we are and responsive means a lot of things, but it goes right down the list to manufacturing special products coming up with new solutions. So I think that gives us an edge, but we’ll see how it plays out. You never know how it’s going to play out. ChampionX has been a great competitor for a long time. And if they continue to do the things they’ve always done, it’s going to continue to be a tough playing field.
Cole Pereira: Got it. You talked a little bit about potentially entering new geographies. I mean, is this kind of a longer-term scenario? Or could you use something like that short-term? Which areas do you think would be the most likely? And do you think you could get into it organically? Or would you have to sort of acquire your way in?
Ken Zinger: Good questions, all of the things we’ve been thinking about. I think it could happen. I think it’s going to be opportunity based, because I think people organically, we would go with a customer. So if a customer suddenly had some work they were doing somewhere where or they wanted to drag us along, we would respond to that. And also the opportunities to buy companies that are small in those places to get a foothold, don’t come along every day. So it will just – if something popped up that caught our attention that fit the bill for what we’re looking for at the price we’re looking to pay, then obviously, we would take a close look at jumping on that. But we’re not looking for anything big. It’s more just to get some people and footprint on the ground somewhere, because that would definitely make – we’ve tried – we’ve spent some time in the Middle East prior working with customers without a foothold there or employees there and building it out, and it’s a tough [slide] [ph] it’d be much more comfortable to just buy an existing business with an existing revenue stream.
Cole Pereira: Got it. And you talked about maybe opportunities to add something by vertical integration as well. Can you just add some details on what that might look like?
Ken Zinger: Yeah. I mean I don’t want to disclose sort of the things that we’re looking at that are important to us. But I mean, we buy products from other companies. And some of them – a lot of what we buy is already basic chemistry, but there is some that we have to buy from a manufacturer that we acted in the way that we like or that they have something – a patented process around. So if there was something unique like that, that could actually improve our supply chain and improve our costs and make us more basic. That’s sort of what we’re talking about, but I don’t want to get into exactly what those chemistries are.
Cole Pereira: Yeah, fair enough. That’s all for me. Thanks. I’ll turn it back.
Tony Aulicino: Thanks, Cole.
Operator: The next question comes from Tim Monachello with ATB Capital Markets. Please go ahead.
Tim Monachello: Hey, good morning, guys.
Ken Zinger: Good morning, Tim.
Tim Monachello: I just wanted to touch on the margins here. I mean it’s been pretty impressive, call it, 220 basis point of margin improvement quarter-over-quarter, a lot more year-over-year. What changed in Q1 that was able to drove those margins higher? And how much of that do you view as sustainable?
Tony Aulicino: I’ll take a shot at that from a financial perspective. I grew a very deliberate in our words. That was a combination of attractive product mix. The few divisions really benefiting from the higher levels of service intensity as evidenced by third-party work that has demonstrated that continued trend in higher number of sea drill per given day. Those are bringing on more prolific wells that have higher additional or initial production rates. And then there was the introduction and adoption of the few products that were beneficial for two reasons. Number one, they created incremental market demand and incremental revenue. And as Ken outlined, the secret sauce are one of them here is our ability to vertically integrate and provide those at levels that are appropriate for the customer to meet their needs in terms of responsible pricing. And if we’re able to control that supply chain and manufacturing internally, we can have reasonable economics as well. One of the unique factors about this quarter though was the fact that we strung together three consecutive months where even before those trends, all of the divisions we’re firing on all cylinders. So, when we look forward going into Q2 that always is a little bit seasonally slower than Q1. And in terms of sustainability of 17.3%, I think that’s a big, big expectation. And it’s going to be difficult to gauge over the next few months, but we’ll come up for air probably in August when we were reporting Q2 and have a pretty good feel for where things are going. We’ve always talked about 14% to 15% target range. We’re going to have to think about increasing that. I don’t think you’ll hear 17% in that range. But stay tuned, and we’ll probably revisit that recommended range next time when we report.
Ken Zinger: Yeah. And to give a little bit of color on sort of how we achieve that is the specialty products we’re talking about. It’s the string in the months together. That was very important. We’ve had big months before. We’ve just never had a big – everything come three in a row line to the quarter. But if you look back to Q1 of 2023 when we were at 13.8% margins, it’s been kind of a steady tick up since then and what’s been happening in that time as we’ve just been reformulating and revisiting supply chain at every level. As our volumes have gone up, our purchasing power has got a little better. I want to make it clear that we’re not charging more for products. We’re in line with the market and the wins that we’re finding are all internal.
Tim Monachello: Got it. A few of those things are kind of on the continuum like rising service intensity and efficiencies that you guys have been putting into the business. Margins are a step change, so I can appreciate that the strong three months in a row was probably a major factor. But a couple of things that kind of stand at me was the barite grinding facility and some new technologies you’re talking about. How significant were those in the quarter?
Ken Zinger: The barite grinding facility, not very much like maybe nothing, I would say. We’re still not running at full capacity there yet. So we’re only buying a little bit. And then with the rig slowdown over the past year, our demand is – we need that facility to be able to run a shift, but it doesn’t need to run 24 hours a day. So it wasn’t a huge impact. But yeah, some new technologies that we have that are unique that provide the customers’ solutions to problems they were having. Those things contributed for sure. They always do. Except in these three months, they were bigger portions of it, right. But it was just the mix.
Tim Monachello: Are those technologies in any specific business line or across all?
Ken Zinger: They are everywhere. Like there’s not one – there’s not a single thing that’s causing this. It’s a whole bunch of stuff coming together and then just having the right mix for a quarter.
Tim Monachello: Okay. Thanks a lot. Unbelievable quarter, that’s bad luck.
Ken Zinger: Thanks, Tim.
Operator: The next question comes from John Gibson with BMO Capital Markets. Please go ahead.
John Gibson: Good morning and congrats again on the strong quarter here. I want to – just a little bit free cash flow conversion remains very strong and above some of the competitor calls we’ve seen out there. What’s been driving this and all things being equally expected to continue?
Tony Aulicino: So the answer is yes, we do expect it to continue. And by, it, it will vary, especially depending on what happens with working capital in any given quarter, that’s the metric that you’re referring to. But it’s been an evolution just like the cash conversion cycle and the ROACE and the margins, it’s a wide cultural adoption of staying true to our CapEx-light, asset-light business model, maximizing margins where we can, minimizing cash burn after EBITDA. And yeah, we do expect to be in – continue to be industry leaders in cash conversion rate.
John Gibson: Clear. And last one for me, on the capital return program you’ve outlined. Does this plan maybe changed at all given where your shares are trading at now and trending with the strong quarters here, maybe towards more of a dividend and less towards buyback?
Tony Aulicino: Yeah. We’ve been pretty steadfast in what’s driving – what drives our buyback philosophy. Number one, do we have the liquidity and the capital to do what we need to do to support the business. So we check that box, we’d absolutely do. And the next one is, if we think our shares are undervalued. I’d expect analyst estimates for the full year 2024 and ‘25 to increase based on what we reported yesterday. We already started seeing that last night. So yeah the share price is up whenever it’s up today. But the multiple is still in the 5 times range, just maybe slightly above 5 times. And I put it out – well, we put it out to investors, and we own 5.5% of the company as well, management and certain Board members. And this is a cash on cash yield still of mid-teens and with the best conversion – cash conversion cycle in the industry and one of the best ROACEs in the industry, it should not be trading in the 5s. So when we’re creating at a much higher multiple, we’ll have that conversation, but we’re not going to bat an eyelash in the 6s for sure.
John Gibson: Fair enough. I’ll turn it back. Congrats in the quarter.
Operator: The next question comes from [inaudible] with Scotiabank. Please go ahead.
Unidentified Participant: Hi. This is [inaudible] calling in for Jonathan Goldie. Thanks for taking my question, guys. One for Ken. There’s another – it’s another – good morning, another strong quarter for share gains in the US Drilling Fluids business. I know you don’t break it out, but are you seeing a similar trend in your Production Chemicals business?
Ken Zinger: Yeah. We don’t break it out, but I mean, generally speaking, that’s exactly what’s happening. The Canadian Drilling Fluids business is a little more mature. We’ve been kind of in this number one spot for 10 years plus. So we ebb and flow a little bit, but the other three main divisions, the two production chemical divisions in the Drilling Fluids division in the US, yeah, they’re all in grow mode still, and they still have plenty of run room.
Unidentified Participant: Got you. Perfect. And another on the US Drilling Fluids business. Can you discuss what’s underpinning that growth? And is there a ceiling to share gains in the US?
Ken Zinger: There’s no ceiling to share gains. I mean, I guess, competition-wise, operators like to have choices. So I would guess that like Canada, when you get to that 35%, 40% market share, there’s probably a roadblock you hit. But as far as opportunity, there’s tons of opportunity and what’s driving it, it’s service, it’s our people, it’s attention to detail, it’s security of supply, it’s infrastructure in the right places, it’s costs that are as good or better than anybody else can provide. I mean it’s just a wide bucket, and our people are really good at all those things. And it’s not just the Drilling Fluids group in the US, that’s how we run the business in every division.
Unidentified Participant: Awesome. And one final one for me. Is there any update on your entry into the Haynesville?
Ken Zinger: No, it continues as talked about, like our – as I’d mentioned in the past, we – when we have one rig working there still. We’re working on some special projects for a couple of operators that we don’t currently work for there to see if we can come up with some technical solutions for them for some problems they have. And if we do, then we’ll probably pick up some rigs sooner. If we don’t, then we’re just kind of getting some offsets and getting some history so that when that rig count actually starts picking up because LNG starts picking up, we’ll be there to grab on to some rigs.
Unidentified Participant: Perfect. Congrats on the quarter. And I’ll turn it over.
Tony Aulicino: Thank you.
Ken Zinger: Thank you.
Operator: [Operator Instructions] The next question comes from Keith Mackey with RBC Capital Markets. Please go ahead.
Keith Mackey: Yeah. Thanks and good morning. Just wanted to start with a question or revisit a question that we’ve discussed before. We’ve historically thought of the Drilling Fluids and Production Chemicals businesses was roughly equal in size in terms of revenue. Tony, Ken, is there any update to that number? Or are they still about 50:50?
Tony Aulicino: Yeah, there we started at that 50-50 when we started disclosing it. And then as it evolved, we did continue to see Production Chemicals grow a little bit in relative contribution. And it’s in the 50 to 55 range for Production Chemicals and 45 to 50 for Drilling Fluids.
Keith Mackey: Okay. Thanks. That’s helpful. And if we just think about the margins for kind of the segments broadly. I know you’re not going to want to get too granular there, but there’s historically been sort of a target of 15% for each of the main operating divisions. How would all of the divisions rank today without maybe asking for specific numbers, how would all the divisions rank today in terms of margins versus each other and versus that 15%?
Tony Aulicino: Yeah. We’re – we can’t rank them, but you did just give us an opportunity to help you guys out a little bit. So we’re happy to say that every single division was north of 15% this past quarter.
Keith Mackey: Perfect. Okay. And just finally for me, Tony, you’ve certainly done a lot of work on the balance sheet over the last few years, both in terms of getting the debt level down and optimizing the debt mechanisms and maturities. I noticed you made a point of calling out some of the ratings agency upgrades there. Can you just talk about how you see the debt stack and mechanisms going forward relative to what you’ve got today?
Tony Aulicino: Sorry, what do you mean Keith?
Keith Mackey: Yeah. Do you have any opportunity, I guess, to think about your debt instruments in terms of optimizing rates and then ultimately optimizing the structure of your debt as you think out the next one, two, three years?
Tony Aulicino: Yeah. No, for sure. So we have our Term Loan A in our credit facility that are currently in place in hindsight, we did the right thing last year by putting in a $250 million Term Loan A that’s now fully drawn. And we have our $450 million credit facility, but we only have $65 million drawn on right now. It was $105 million at the end of Q1. We put that TLA in place last year for a very specific reason. It was because we were starting to put up the numbers and not everybody was acknowledging them, and we continue to believe that we would be improving those numbers and but not everybody, and I mean, debt investors, rating agencies, equity investors. And we did our part. Over the year, we grew to the numbers that you saw over the last year, including this past quarter, number one. And the other reason we did that was, we didn’t want to refinance that bond in the market, but had high interest rates last year and was not very receptive to new bond deals last year. And then we kept doing our part. The macro has obviously improved from a rate perspective. If you use S&P and DBRS’s positive actions as a barometer, obviously, even the debt side of the investor house has acknowledged and is acknowledging the very strong creditworthiness and cash flow generation capability of this business. So I continue to say, we will access the bond market when it makes sense at the right price in the right terms. And we will definitely do that before the TLA goes current next April, and we’ll be opportunistic if we get the right terms in the right market window.
Keith Mackey: Okay. That’s great color. Thanks very much. I’ll turn it back.
Operator: This concludes the question-and-answer session. I would like to turn the conference back over to Ken Zinger for any closing remarks. Please go ahead.
Ken Zinger: Thank you. With that, I’m going to wrap up this call by saying thank you to everyone who took the time to join us here today. We continue to be very optimistic about the future here at CES Energy Solutions. We will be hosting our Virtual AGM on June 18th, and we look forward to speaking with you all again on our Q2 update in August. Thank you for your time today.
Operator: This concludes today’s conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
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